Is Buy and Hold Dead???
I appeared on CNBC’s Squawk on the Street this past week to discuss my views on the market. While I was preparing for my interview, I realized that what I was about to discuss would go against the grain of most of the investing public. I was about to tell millions of CNBC viewers that to make money in the market, they had to actively trade and they needed to partake in market timing because the main concept of investing that they have been taught over decades was flawed. Buy and Hold won’t work.
So why is Buy and Hold not the best approach? Let’s start with the fall of the stock market in late 2007 through March of 2009, a decrease of 55 percent. Since that crash, the market has increased approximately 60+ percent (talk about being whipsawed.) But where do we go from here? There is nothing to keep the rally going. As a matter of fact, there is so much turmoil in the market that we could be flat for some time. And when I say flat, what I really mean is ‘range bound.’ This simply means that the market will bounce back and forth from a high point to a low point and back again. This is the type of market when the average ‘slow and steady wins the race’ investor doesn’t make a dime. This market is very similar to that of the 70’s to early 80’s when the Dow remained at 1,000 point for over a decade.
This will likely be the case for several years due to the uncertainty in Washington, on Wall Street and Main Street. Investors and business owners lack clarity on several key issues:
•Tax increases over the the coming years
•The rise of health care costs
•If Americans will be rehired and begin spending again
•If banks will begin freeing up cash and begin lending again
•The future of state and federal unfunded liabilities like social security and pensions
•The impact inflation will have over the next decade or how America will ever payback the tremendous amount of money it owes
This uncertainty is precisely what will keep the markets range bound for several years to come.
So how do you make money in a market like we are in, and could be in for several years? How do you take advantage of the opportunity? You cannot do it with passive management like investing in the indices, and you cannot really do it with traditional actively managed funds like long only investments. In other words, you, or your investment professional, must change your strategy to take advantage of the volatility. You must buy when the market hits the low in the cycle and then sell when it gets near the high point. And to really make money, this process must be repeated again and again. But, most investors do not have the time, inclination or stomach to partake in this investment roulette. So if you are not that active, daily researching investor then you need to find someone who can.
There is a certain type of fund that can do this for you. As a matter of fact, there are several. A manager that has the ability to buy long and sell short within his portfolio (‘Long/Short’ fund) may be able to help you accomplish your goal. Here’s how it works. A Long/Short manager can buy a stock they think will increase in value and hold it (Buy Long) or sell a stock through a borrowing technique if they think it is going down (Sell Short). You can make money either way. And interestingly enough, most managers, while they cannot sell short a stock, they are already doing the research regarding those stocks, but they are not able to act on that research.
What does this mean to you? When managers are reviewing which stocks to buy, they inevitably will find:
•The stocks that they want to purchase
•The stocks they probably do not want to hold
•And the stocks they would not buy if their life depended on it. This group is the one that they would short if they were able. Most fund managers are not permitted to short stocks based on their funds objective and prospectuses.
While there are several other types of investments that can take advantage of this up and down volatility (market neutral, absolute return, quant funds, managed futures and alternative strategies,) the key here is that active trading is what will make money over the next few years. Passive investments like index funds and buy and hold strategies simply will not earn their keep.
So don’t abandon Buy and Hold forever, just put in on the shelf for a few years.
For more info on active investing and Long/Short strategies, visit our website at www.campbellwealth.com
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buy and hold was NEVER a good option.
learned my lesson the hard way by buying and holding
blue chips in the 60s and rode ibm down from a high
of 300 until i bailed.
you can always , after the fact, pick some number
of years, and show how you could have bought and
sold for a big gain.
but
you can also do that and show how if you HAD TO SELL
at some other time you would have lost big time.
and nobody can turn the clock back to buy at a low
point, nor know when to sell at a high especially
when you need the money for retirement or
emergencies.
read the book: where are the customers yachts?
the only people who are guaranteed to
make money on stocks are the bookies, er… brokers.
the other fallacy with equities is clearly shown by
Taleb in his book about black swans. and which
was confirmed by recent the wall street meltdown
that required our tax money to bail out the bad
BETS being made by the big financial corps.
Joe Sixpack,
Interesting take. I agree that it is difficult….but keep in mind that there are investments that had a positive return in 2008.
Taleb is obviously correct about “black swans” but he also says not to try to predict them, but rather try to utilize projection features for when they occur.
Happy Investing!
Kelly Campbell
We cannot set aside and forget those years that stock investment is consistently going down, but don’t take this path as your way to turn back. We are now moving forward after recession, so i think possibility it now to become positive.
Wow very interesting.
I don’t think it’s dead, but you have an interesting point of view.